The Green Sheet Online Edition
February 27, 2017 • Issue 17:02:02
Rebranding as an equipment leasing professional
As part of the ongoing rebranding discussion I've focused on in this column, I have presented a number of alternative financing solutions: merchant cash advance, alternative business loans, accounts receivable factoring, accounts receivable financing, purchase order financing and asset based lending. So how about one more rebranding discussion centered on equipment leasing?
Equipment leasing is just one more option MLSs can use in their efforts to rebrand themselves and provide value in the marketplace that merchants will be willing to pay for. GS Online MLS Forum member DEE MALIK recently said, "Some of you guys are super successful in this industry. You have forgotten more than I will ever learn. However, after all the success and all the years that we have been a part of this space, the merchant looks at us as only a cost center rather than a profit center.
"How is that possible when we offer core services that may indeed make up their profit margins? The only fighter I've ever watched that could sting you while backing up is Ali. We need to throw punches while advancing our offerings."
Equipment leasing is one of those ways you can "throw punches" as DEE MALIK put it, positioning you as a profit center for the merchant rather than just another cost center.
A different kind of equipment leasing
As an MLS, you are likely already familiar with the leasing of credit card terminals. POS terminal leasing may even be in your MLS toolkit. I, however, have never recommended leasing a credit card terminal to a merchant. Due to my customer-first approach, I believe buying a terminal wholesale has always been the better option for merchants, thus, that is the option I have recommended.
However, there are other types of equipment you can lease that actually make sense for merchants and do not involve putting a $300 terminal on a $100-a-month lease for 36 months. Consider the diversity of equipment types used in various business verticals – from restaurants to medical offices to grocery stores. Countless merchants very much need flexible equipment leasing options over the lifetime of their businesses. Leading with this service would make you an equipment leasing broker.
A lucrative speciality
As an equipment leasing broker, you would bring together three different parties:
- The merchant, who wants to acquire equipment
- The equipment manufacturer, who seeks to sell the equipment to the merchant
- The equipment leasing company, whose role is to set up a lease for the merchant to acquire the equipment from the manufacturer
This combination of business objectives gives you the opportunity to make a commission from the equipment leasing company, as well as from the manufacturer upon successful completion of the entire transaction. For example, your merchant might be looking for a $200,000 piece of operational equipment. You might have a contract with an equipment manufacturer to resell their equipment, as well as a network of equipment leasing companies looking to setup a lease program on an equipment acquisition.
You could get, let's say, a 7 percent commission from the equipment leasing company on a lease approval amount of $200,000, which would come to $14,000. Then your equipment buy rate from the manufacturer could be $194,000, and you could mark it up to $200,000 for resale. Thus you would make $6,000 from the equipment sale. This is a total of $20,000 earned from one piece of equipment. You just need to do five of these transactions per year to bring home $100,000.
In the payments industry, lease is a contract between a leasing company (known as the lessor) and a merchant (known as the lessee). The lease gives the merchant the right to use the equipment for a specific period of time (known as the lease term), in exchange for a specific payment (the monthly lease payments).
Within this transaction, the leasing company would (usually) purchase the equipment from the manufacturer and have the manufacturer ship it to the merchant's location. The leasing company makes its money back from the lease payments and makes profit by receiving a higher lease payback amount from the merchant than the cost of the equipment purchase.
With most leasing options, when the lease term ends, the merchant will be provided a number of choices on what to do with the equipment. The merchant could purchase the equipment, return the equipment or set up a new lease contract.
There are several leasing options a merchant can choose from, including the:
- True lease: Merchants usually use this structure if the equipment might depreciate rapidly (become obsolete), so it wouldn't make sense to purchase it. This option usually has lower payments, is better for tax planning, and offers the choice of returning the equipment, purchasing the equipment, or doing another lease contract at the end of the current lease term.
- Capital lease: This is used usually when a merchant knows upfront that he or she plans to buy the equipment. The purchase price and interest costs are spread throughout the lease term, and the merchant owns the equipment at the end for usually a $1 buyout.
- Skip lease: This is for seasonal merchants who can't make payments every month. With this structure, merchants will have months when they make no lease payments and then some months when they make lease payments.
- Step up lease: This is basically a situation in which a lease payment would start out low but increase over time due to a piece of equipment being expected to generate more profits for the merchant as time goes along.
- Deferred lease: This is for merchants who need equipment right away, but their operations will not generate revenue for about 90 days. So with this structure, merchants would be provided the equipment but not expected to make their first lease payments until approximately 90 days thereafter.
- Master lease: This is used when a merchant might be leasing multiple pieces of equipment over a period of time. This contract would be used to manage the leases more efficiently than having all of them dealt with separately.
- Sale leaseback: This is for merchants who have already bought equipment and want to use it for working capital purposes. In this situation, merchants would sell their equipment to a leasing company, get capital upfront, and then sign a lease contract with the leasing company to lease the equipment back to them.
John Tucker has over 10 years of professional experience in commercial finance and business development. He is also an M.B.A. graduate and holder of three bachelor's degrees in accounting, business management and journalism. To connect with John, please send him a connection invite via LinkedIn at www.linkedin.com/in/johntucker99.
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